Quixtar Sued for Alleged Fraud and Racketeering

Stephen Barrett, M.D.

Two former distributors have filed a suit charging that Quixtar is essentially a pyramid scheme and that the company and high-level distributors have defrauded new distributors in several ways [1]. Quixtar is a multilevel marketing (MLM) company founded in 1999 as the successor to Amway in the United States, Canada, and the Caribbean. It is privately owned by the families of Amway founders Rich DeVos and Jay Van Andel through the Alticor holding company, which is also the parent of Amway.

The Federal Trade Commission's policies for determining whether a company is a "legitimate" MLM or a pramind scheme has been based largely on a case the agency brought against Amway in the 1970s [2]. The key consideration is whether new distributors have a genuine opportunty to conduct a retail business or are merely buying the right to recruit other distributors. In 1979, the FTC concluded:

Some promoters posing as direct selling companies have rewarded recruiting itself in 'pyramid' plans, involving 'headhunting' and 'inventory loading.' Recruits earn money by securing further recruits, and there are few product sales to consumers. In order to recruit an effective sales force, Amway encourages its distributors to sponsor new distributors. This is not, however, a pyramid plan. In the Amway system, the incentive to recruit comes from the commission distributors receive on product sales by sponsored distributors in their organizations. But, by several rules, Amway requires that commissions are not paid unless the products are sold to consumers. Distributors must each sell to ten retail customers every month; the distributors must certify that 70% of the products purchased by them during the month have been resold; and inventory loading is further deterred by a rule requiring distributors to buy back the inventory of any of their sponsored distributors leaving the business [3].

In other words, the FTC ruled that Amway would not be considered a pyramid scheme if the sponsoring distributors:

Do not require purchase of product inventory in order to become a distributor (the "Initial Investment Rule").

Ensures that distributors do not attempt to secure performance bonuses solely by buying products for themselves. (The "70% Rule" requires that distributors must resell at least 70% of the products they have purchased each month.

Will buy back any unused marketable products from a distributor whose inventory is not moving or who wishes to leave the business (the Buyback Rule").

Although Quixtar's policies include these rules, the suit charges that it is does not enforce them. Specifically:

The defendant companies and individuals recruit people to become Quixtar distributors, entice them to purchase Quixtar, products and related ''tools and functions" through material false statements and omissions, and then distribute the proceeds of product sales to new recruits based almost exclusively on participants' recruitment of new victims, rather than on the sale of products to retail users of Quixtar's' products. As a result of investing in the scheme, plaintiffs and the Class have suffered millions of dollars in losses. . . .

The first part of the illegal pyramid scheme consists of a multi-level marketing business run by Quixtar. At the bottom rung of the operation is a network of so-called independent distributors, euphemistically referred to as IBOs. Quixtar induces new recruits to join the Quixtar, program through material false representations that such recruits will be able to re-sell Quixtar products for a profit. Quixtar, purports to sell its consumer products through the IBOs, but in fact few of Quixtar’s products are ever sold to anyone other than the IBOs, and IBOs are not financially rewarded by Quixtar, or its affiliated companies for selling the products to consumers. The prices IBOs pay for Quixtar's products (and associated costs) are so high that any profit on retail sales is virtually impossible. In practice, 95% of Quixtar’s products are not sold to retail consumers, but rather to the IBOs. Because the IBOs are Quixtar’s actual customers and consumers of its products, Quixtar requires an ever expanding network of so-called distributors (IBOs) in order to keep Quixtar afloat.

Quixtar's lowest level distributors are instructed not to waste their time on marketing and selling the Quixtar, products to actual retail consumers, but instead to focus on consuming the products themselves and recruiting others to be distributors. . . . Quixtar products would be difficult to sell to consumers unaffiliated with Quixtar in any event because they are sold by Quixtar at inflated prices when compared to similar products sold in the retail marketplace. . . .

The second part of the defendants' pyramid scheme consists of a group of businesses that sell "tools and functions" purportedly to help downline distributors sell the Quixtar products. . . .

In truth, the defendants' statements about the need for tools and functions are materially false. These "tools and functions" do not help the distributors sell Quixtar products to end consumers at retail. Few Quixtar products are sold to consumers; instead, most are purchased by Quixtar distributors for their own use, and to the extent distributors do sell the Quixtar products, any profit is eliminated by the costs of buying the ''tools and functions." . . .

In truth . . . the overwhelming majority of distributors lose money.

The suit also charges that Quixtar has "unconscionable" arbitration policies that prevent most distributors from recovering their losses if problems arise.